Tuesday, September 12, 2006

Calls of Note Part 1

Couple of firms are today with cautious comments on Casinos and especially HET:

- Merrill Lynch is lowering their ests on Harrah's Entertainment (NYSE:HET). Firm's estimate for 3Q goes from $1.02 to $0.97 and their estimate for 2006 from $3.51 to $3.45. The primary driver of this reduction is a more competitive promotional environment in Atlantic City.

Firm notes that for the first two months of the quarter, revenue at Harrah's A.C. portfolio has decreased -2.3% versus their estimate of +2%. However, the real news appears to be the potential for margin deterioration owing to increased competition from the recently expanded Borgata; accordingly, they lowered their blended EBITDA margin for Harrah's A.C. portfolio from 35.0% to 33.5%.

After a challenging July, where most riverboat markets generally came in below plan, August results were clearly better with most of Harrah's properties generating revenue slightly better than firm's projections. However, they note that the quarter will be aided by a temporary casino that opened on the Gulf Coast and the ongoing performance of the New Orleans land-based casino.

- Thomas Weisel Partners notes Atlantic City win rebounded in August, but their analysis suggests that performance at BYD's Borgata and for HET could be tracking light. Results in other markets for the two appear to be on target. Firm is OK with estimates, but does see modest downside risk.At HET win rose 1% in August and fell 2% quarter to date. The current trajectory puts HET on track to hit $560mn for the quarter versus firm's estimate of $571mn and each $5mn would affect EPS by $0.02 (3Q EPS: TWP estimate $1.04, consensus $1.03), all else being equal. Firm's sum-of-the-parts analysis for HET yields a current fair value of $78-81. Maintains Outperform.

Notablecalls: Bear Stearns commented on HET yesterday trimming their 3Q06 EPS to $0.95 from $1.01 to account for lower EBITDA from its Atlantic City properties (due to lower margins). Firm's 4Q06 and full year 2007 EPS are unchanged. Firm believes that the market has become excessively promotional (they think largely due to the competitive pressures stemming from Borgata's public space expansion) as some operators reported high levels of comping that were not seen since Borgata opened in Summer 2003.

Would not be surprised to see some additional weakness in HET over the next couple of weeks.